Article Category: Dispute Resolution

Authored by  Rajdeep Choudhury

“Gasmaggedon” Sweeps Over Global Gas Market

Manufacturers entangled in logistical nightmare as virus-hit China limps back to work

Coronavirus casts a shadow on solar projects

The above headlines are a stark reminder that the humanitarian challenges brought about by the outbreak of severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) that is causing the coronavirus disease (COVID-19) are closely followed by logistical challenges and economic impact.

On 11 March 2020, the World Health Organisation (WHO) classified the outbreak as a “pandemic”, which is considered more severe than an “epidemic” because of its geographical spread. There is scarcely an area of economic activity that is untouched by the outbreak.

The crisis has shone a spotlight on over-dependence of supply chains on China. Once the worst is behind us, decoupling from China that had already commenced against the backdrop of rising labour costs and trade tensions may accelerate.

India

In India, certain industries have been especially affected by the outbreak.

In the pharmaceutical industry, China’s dominance of the active pharmaceutical ingredient (API) is now being re-examined. It is estimated that Indian pharmaceutical companies rely on China for approximately 70% of their API requirement and it is feared that manufacturing facilities of pharmaceutical companies in India, which is the world’s largest manufacturer of generic drugs, will be affected. India has announced restrictions on the export of twenty-six ingredients and the medicines made from them. There is evidence that prices of certain drugs in India have started to increase.

Already reeling from demand shock, the automotive industry in India is preparing for transition to higher emission standards from 1 April 2020. Over-dependence on suppliers in China for automobile parts and components is presenting the industry with another headache. Most of the major manufacturers are apprehensive that production cuts will be inevitable as activity in the supply chain in China and South Korea have been curtailed and securing supply from alternative sources is not practical.

One of the worst affected in India may be renewable energy projects. China is a leader in the global solar supply chain and dominates the production of ingots, wafers, cells and modules. Nine of the top ten cell makers in the world are Chinese. It is estimated that Indian solar power producers meet approximately 80% of their requirements for solar cells and modules from China. To take advantage of the generally falling prices of PV technology and the relatively short construction period for solar PV projects, power producers pursue aggressive scheduling of supply and services contracts with their contractors – that is risky because unexpected delays in procurement and construction can lead to critical delays in the commissioning of projects and expose the producers to liability under power purchase agreements (PPAs).

Solar power producers in India, already struggling with wafer-thin margins on the back of record-low tariff and a volatile depreciating Indian Rupee, are being battered by a perfect storm: regulatory risk, the ballooning of regulatory assets and payment risk. There are even murmurs of discontent about producers experiencing higher-than-expected degradation in their solar plants owing to significant variability in the quality of solar cells.

The author is fielding enquiries from solar power producers in India concerned about notifications they have received from their suppliers in China about delays in manufacturing, inspection, certifications from accredited labs and transportation. The imposition of quarantine, production bans and city-wide lockdowns may have a significant impact on ongoing projects and impair contractors’ abilities to participate in new projects.

Prolonged disruption due to SARS-CoV-2 can impact projects due for commissioning later in 2020. CRISIL, the rating agency, has stated that in the period from July onwards, scheduled commissioning dates on nearly 3 gigawatts of solar projects are at risk of being missed – if that materialises, producers may have their bank guarantees encashed. If the producers’ delay is significant (beyond 6 months), the consequences become more severe: contracted capacity of projects may get reduced or an event of termination may be said to have occurred with secondary obligations to pay additional damages ensuing.

At the time of this article, it is not clear whether there exists in law valid grounds for affected parties to receive relief from liability for delayed or failed performance of contracts in the aftermath of the outbreak of SARS-CoV-2.

What is Force Majeure?

The doctrine of force majeure is a creature of contractual innovation. Its precise scope is agreed between the parties in the terms of the underlying contract. Force majeure is not a term of art and the contract will have to define with care the parameters of the relief that will be afforded to the parties.

Force majeure provisions import the principle that upon the occurrence of an event or circumstance that is not reasonably within the control of and would not have been avoided or overcome by a party, which prevents or delays that party from performing some or all of its contractual obligations, that party will be relieved from liability which might otherwise arise as a result of that party’s failure to perform those affected obligations. Force majeure provisions do not suspend the requirement for performance and typically require the affected party to continue to perform its obligations to the extent not prevented by the event of force majeure. In some contracts, after a period of prolonged event of force majeure, parties may be permitted to terminate the contract with moneys being payable depending on the nature of the force majeure event.

Express force majeure provisions began to make appearances in English law governed contracts in recognition of the perceived unfairness of the decision in Jacobs v. Credit Lyonnaise (1884), where although the defendants would have escaped liability for failure to perform owing to the doctrine of force majeure in French law, then in force in the country where part-performance of the contract was undertaken, it was held that because English law applied and because there was no equivalent common law principle (including frustration) that could provide relief, the defendant shippers were held liable.

The practical utility of force majeure contrasts with the rigid common law doctrine of frustration although they are similar in the sense that they both deal with occurrences beyond the control of parties to an agreement. Under the doctrine of frustration, where subsequent to the execution of a contract, the emergence of supervening circumstances beyond the control of the parties renders further performance of the contract impossible or radically different from what had been contemplated in the contract, the contract will be terminated and the parties will be discharged from the requirement of further performance (as a matter of law). The doctrine evolved as a means of mitigating the perceived harshness of the law’s requirement for strict compliance with a promisor’s promises. Under Indian law, the doctrine of frustration is well-developed by judicial precedents interpreting Section 56 of the Indian Contract Act, 1872.

Securing Force Majeure Relief

The following are the key considerations for affording a party force majeure relief:

(a)    Burden of proof: the affected party carries the burden of proving the validity of its claim for force majeure relief. It has to adduce evidence that an event of force majeure occurred, which was beyond its reasonable control and which prevented or delayed its performance of the affected obligations;

 

(b)   Scope and interpretation: as noted above, because there is no accepted definition of force majeure, force majeure provisions typically identify a series of events or circumstances that can legitimately be claimed by a party as an event of force majeure. This is critical because the event or circumstance must fall within the definition of force majeure if the affected party is to have any prospect of securing relief. This will turn on the specific wording of the provision subject to the rules of contractual interpretation. In disputes arising out of sophisticated and complex contracts, tribunals will carry out a textual natural and ordinary interpretation of the force majeure provision in order to ascertain its objective meaning.

A force majeure provision may set out an exhaustive list of events or circumstances that constitute events of force majeure. Commonly listed items are occurrences such as adverse weather conditions, explosions, fire, acts of God and other natural catastrophes. It is not clear whether in the selection of the above descriptions of events or circumstances, the outbreak of SARS-CoV-2, which is a biological entity that can cause an infectious disease, would fall within the contemplated use of the provision.

The concept of force majeure is wide enough to accommodate man-made interventions such as wars, blockades, strikes and legislative and executive interference and can even be extended on account of changes in law, economic hardship and accidental damage to specified facility. 

Alternatively, a force majeure provision may set out an inclusive list that recites several events or circumstances for the purposes of illustration only, with a catch-all provision that force majeure relief will also be extended on account of any other event unless that other event is specifically named in a list of excluded items. In any event, the interpretive rule of ejusdem generis – that when a list of specific items belonging to the same class is followed by general words, the general words are to be treated as confined to other items of the same class – will be used to determine contractual intention.

Force majeure provision may exclude outright certain events such as changes in either party’s market factors, a party’s inability to finance its obligations under the agreement or the unavailability of funds to pay amounts when due, breakdown or failure of plant or equipment caused by normal wear and tear or by a failure to properly maintain such plant or equipment from constituting events of force majeure.

Occasionally, events that are carved out of force majeure can be brought back within its fold if those events were themselves the consequence of an event of force majeure. For example, in some PPAs in the solar power sector in India, the unavailability or late delivery of equipment, although not an event of force majeure by itself, may constitute an event of force majeure if it was the consequence of an event of force majeure;

(c)    Causation: another key threshold consideration is causation. Depending on the precise wording of the force majeure provision, it is for the affected party to demonstrate that an event of force majeure (and not some other factor) delayed performance of the contract (i.e. a lower standard) or caused the failure in performance of the contract (i.e. a higher standard) notwithstanding the commercially reasonable efforts of the affected party to overcome or mitigate the effect of the event of force majeure; and

(d)   Notification: the affected party is required to notify its counterparty of the occurrence of an alleged event of force majeure within a specified timeframe and failure to do so can be fatal to its eligibility to force majeure relief. The notice requirement is ongoing and the affected party must continue to update the notices periodically during the subsistence of the event of force majeure specifying the actions being taken to remedy the event.

Limitations on Securing Relief

The extent of force majeure relief will be affected by the following considerations:

(a)    Duty to mitigate: in the unlikely event that an express duty to mitigate is absent, a duty to do so may be implied albeit on commercially reasonable terms, which can be ousted only by clear and unequivocal language. Provisions may specify the extent to which a party declaring force majeure must mitigate not only the event of force majeure but also its effect.

In a long-term LNG sales and purchase agreement the author has advised on, the seller was required to apportion any remaining available production capacity at its LNG liquefaction facility amongst each of its foundation customers on the basis of the proportionate share of each foundation customer’s adjusted annual quantities to the sum of the adjusted annual quantities of all the foundation customers. This meant that non-foundation customers would not have been entitled to any LNG if production at the facility was sufficient to meet the entitlement of foundation customers only.

In some PPAs used in the solar power industry in India, there are express provisions that require power producers to make reasonable efforts to mitigate the effect of an event of force majeure. Might it be reasonable to expect a solar power producer to attempt to source modules and other equipment from alternative vendors? Did the producer make effort to obtain quotations from alternative vendors and freight forwarders and be able to demonstrate that it did so? Did the terms of those quotations meet the standard of commercial reasonableness given that prices from alternative vendors in Taiwan and Malaysia are estimated to be about 15 to 20% higher than the prices that are typically quoted from vendors in China? In light of the global footprint of SARS-CoV-2, was there available capacity with any other manufacturer in any event? Were there pre-existing or concurrent delays attributable to the power producer that were aggravated by the delay caused by the event of force majeure? Given that businesses endured the outbreak of another virus in 2002 (SARS-CoV), was the outbreak of SARS-CoV-2, in fact, not unforeseeable? These are all key issues that a tribunal will have to address if a power producer’s counterparty contests its claim for force majeure relief.

(b)   Certifications: force majeure certificates issued by governmental agencies may aid an affected party’s efforts in securing force majeure relief, but they may not prove determinative.

In another long-term LNG sales and purchase agreement, it was an express term that an “epidemic” would constitute an event of force majeure. The WHO’s categorisation of the outbreak as a “pandemic” may be of significant persuasive value in cases where the force majeure provision contains appropriate language.

In response to industry concerns, on 19 February 2020, the Department of Expenditure, Ministry of Finance, Government of India issued a cryptic Office Memorandum stating that the outbreak that has caused disruptions in the supply chain should be considered as a “natural calamity” and force majeure provisions may be invoked “wherever considered appropriate”. This memorandum may persuade pliant counterparties, but it is debatable whether such certificates have force of law. Ultimately, the question of whether relief will be afforded can be settled only by construing the terms of the contract and assessing each case on its merits. Even if force majeure relief is granted, producers may need financial support to deal with working capital costs and interest payments due to delays in commissioning.

Way Forward

There have been reports of businesses rejecting force majeure notices received from affected parties. PetroChina and CNOOC are reported to have declared force majeure on their LNG import commitments in China although Shell and Total have rejected CNOOC’s claims. PetroChina is apparently struggling to gather sufficient workers to operate four of its LNG regasification terminals in China. Sinopec and CNPC are reported to be mulling over invoking force majeure provisions in their respective contracts.

The author is aware of businesses in India who have overstated their eligibility for force majeure relief. As a negotiated term of contract, the language of the provision and the facts and circumstances of the affected party will determine the prospects of a successful claim.

Alternatively, parties may wish to circumvent the effect of a restrictive force majeure provision by claiming relief under the doctrine of frustration. Owing to the more limited application of this doctrine, however, this may well be more difficult to establish. It may be that counterparties, mindful of nurturing long-term relationships, will choose to be pragmatic and accommodate claims for relief to a limited extent.

Parties wishing to assert a claim for force majeure relief need to prepare well. That involves compiling a dossier on the event or circumstance constituting an event of force majeure, retaining all relevant documents and complying with notice provisions. Those intending to resist claims for relief should scrutinise whether notice provisions have been complied with and put affected parties on notice about establishing the chain of causation.

Authored by Chinmay J Mirji and Charitha V

Women play an integral part in developing a balanced and inclusive workplace. With the objective of preventing and protecting women at the workplace and to ensure effective redressal of complaints, the Sexual Harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act (POSH Act) was enacted in 2013. Because of this Act, every company is mandated to have a well-documented mechanism to address complaints and offer guidelines to initiate action against any sexual misconduct, thereby creating an environment where every woman feels safe. However, in recent times it has been observed that the very Act enacted for the safety of women has been used by women employees as a weapon to achieve their personal vengeance against their male colleagues and employers.

The protection envisaged under the POSH Act is being misused and abused by women, however the statute has a remedy for the same as the POSH Act includes a specific provision for punishing the complainant for filing of the false or malicious complaint. Section 14 of the POSH Act provides for penalizing the complainant if the complaint is found to be false with malicious intent. Section 14 of the POSH Act read with Rule 10 of the POSH Rules deals with the punishment for filing false or malicious complaints by the complainant or any other person who is involved in the conspiracy of filing a false or malicious complaint or producing false or misleading documents or evidence. Section 14 of the POSH Act clarifies that the mere incapability to substantiate a complaint or failure to provide adequate proof does not invite action.

The same has been observed by the Hon’ble High Courts in India as stated below:

• Anita Suresh Vs Union of India & Others, P (C) 5114/2015: The Hon’ble High Court of Delhi has dismissed a writ petition filed by the complainant and has passed an order directing the petitioner/complainant to pay a fine of INR 50,000 for filing a false complaint and misusing the provisions of the POSH Act.
• Union of India Vs. Reema Srinivasan Iyengar, WP Nos. 10689, 24290 and 4339 of 2019: The Hon’ble High Court of Madras observed that ‘Though the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 is intended to have equal standing for women in the workplace and to have a cordial workplace in which their dignity and self-respect are protected, it cannot be allowed to be misused by women to harass someone with exaggerated or non-existent allegations.’

The law is clear about the difference between an accusation that is not proved and a complaint that is false or maliciously filed. A complaint filed by the complainant with the knowledge that such a complaint is false or filed with malicious intent should not go unpunished. It is pertinent to note that it is a criminal offense on the part of the management/employer if they fail to take appropriate action against the allegedly aggrieved woman or false witness who takes recourse under the POSH Act as a way out to cover up their transgressions.

Authored by Faranaaz G Karbhari & Ishwar Ahuja

It is a cardinal principle of the Arbitration & Conciliation Act, 1996 Act (Act) that parties are free to decide the number of arbitrators (provided it is an odd number) as well as the procedure for appointing them. However, if parties are not able to agree on the said procedure, or constitute the arbitral tribunal to their mutual satisfaction, either party has a remedy under S.11 of the Act, which provides a detailed mechanism for appointment of arbitrators through judicial intervention. The Act provides for appointment of arbitrators by consent, failing which the parties, can then approach the Courts to intervene & appoint the Arbitrator / Arbitral Tribunal.

S.2(1)(f) of the Act defines an ‘international commercial arbitration’ as an arbitration in connection with disputes arising out of legal relationship which must be considered commercial under Indian law, where either of the parties is a foreign national or resident, or is a foreign body corporate or association or body of individuals whose central management & control is exercised in a country other than India, or Government of a foreign country.

In case of an international commercial arbitration, for seeking appointment of arbitrators, a request will have to be filed by a party before the Supreme Court under S.11(9) of the Act.

However, recently the Bombay High Court in the Earnest Business case has even given that a go bye if the parties appoints an arbitrator by mutual consent.

The present article focuses only an aspect of this judgment, i.e. appointment of an arbitrator in  an international commercial arbitration(‘ICA’)[a].

Brief background of the Case

The parties to the present case had entered into certain Business Service & Facilities Agreements (Agreements), which were determined by efflux of time, under which the deposits were made by the Foreign Party with the lessor of the premises on refundable basis. The parties had also agreed that the said agreement was subject only to the laws of the Union of India & that the disputes between these parties would be subject to the exclusive jurisdiction of the courts at Mumbai.

Upon the determination of the said Agreements the disputes arose between the parties on vacation & handing over of the premises to the Lessor/Indian Party & refund of the Deposits made by the Foreign Party.

In view thereof the Original claimant (Foreign Party), i.e.  the Respondent in the present case, filed a petition under S.9 of the Act before the Bombay High Court praying for various interim measures of protection.

During the pendency of this S.9 petition, the parties exchanged some names of the persons & concurred to the appointment of one of the persons as a sole arbitrator in writing. The High Court, in its order under the S.9 petition, recorded the consent of the parties & appointed the sole arbitrator to decide the dispute between the parties.

Thereafter, both parties participated & submitted themselves to the arbitration proceedings before the said sole arbitrator. The Petitioner  in the present case filed the counter claim & set off against the statement of claim filed by the Foreign Party. Consequently, the sole arbitrator passed an award in favour of the Foreign Party & dismissed the set off & counter claim of the petitioner . Accordingly, the petitioner  filed an application under S.34 of the Act before the Bombay High Court impugning the said arbitral award, in which the present judgment came to be passed.

Challenge as to the Appointment & Jurisdiction of the Sole Arbitrator by the Judgment Debtor

It was contended by the Judgment Debtor that the appointment of arbitral tribunal was bad in law as it could be made only before the Supreme Court under S.11(9) of the Act & not by the High Court under S.11(6) &thus, the entire proceedings before the sole arbitrator was without jurisdiction. While impugning the said award it was submitted that the Bombay High Court, while exercising powers under S.9 of the Act, could not have appointed the sole arbitrator & thus such appointment was ex-facie beyond its jurisdiction, & was therefore a nullity. Although the said issue of Jurisdiction was raised for the first time in the S.34 Petition but however since the same went to the root of the matter, the Petitioner  was entitled to raise the same even at the stage of the Appeal. In support of these the Petitioner   relied upon the case of Anees Bazmee.[b] in support of his contention as the Tribunal’s jurisdiction &its appointment.

The Respondent distinguished the said precedent laid down by the Bombay High court & relied by the Petitioner  & argued that the Petitioner  had voluntarily participated & submitted in the arbitration proceedings before the arbitrator without any protest at any stage & had raised this issue only after receipt of the arbitral award against him.

Since the parties had already agreed to the constitution of the Tribunal, &after exchanging name of different persons to act as Arbitrator mutually came to an agreement to refer their dispute before the said Arbitrator, It was further argued that there was neither any necessity to file any application under S.11(9) of the Act nor such application was filed by the Respondent.

Decision

The High Court held that since there was no dispute about the name of the arbitrator between the parties & that the parties had agreed to the appointment of the sole arbitrator prior in time to an order passed in S. 9 Petition filed by the Respondent/Org. Claimant the filing of the filing of an application under S.11(9) of the Act before the Supreme Court was therefore not necessary & thus the Arbitral Tribunal so appointed by consent did not lack jurisdiction while adjudicating upon disputes & differences arose between the parties & it was further noted that an order appointing the arbitrator was not passed in an application filed under S.11(6) of the Act for appointment of an arbitrator &therefore  the Bombay High Court did not exercise any powers under S.11(6) of the Act.

Comments

The Bombay High Court thus can be said to summed up its decision by holding that parties can agree on appointment of an arbitrator in any proceedings in court without filing an application under S.11(6) or 11(9) of the Act, as the case may be, including in a S.9 petition or even without intervention of court, which may give a relief to the foreign parties having receivables in India under an Arbitration Agreement.

it is pertinent to note that such appointment was only with the consent of the parties, & the order under the S.9 petition merely recorded such prior agreement between the parties. Thus, in all other cases, where such agreement between the parties is not in existence, recourse to an application under S.11(9) before the Supreme Court, in an international commercial arbitration, would be proper.

The Bombay High Court, in the present case, took a pro-arbitration stand as it accorded primary importance to party autonomy, notwithstanding the nature & stage of the ongoing proceedings before it. So long as there is consent of the parties, even a High Court can, in any proceeding, appoint an arbitrator for ICA . Although this approach is likely to aid in expediting the movement of matters from courts to arbitration but the sequitur still stands on how the High Court waved the condition & gave a go bye when S. 11(9) pertains only to Apex court, it being a Foreign Award passed in an International Arbitration.

Now it is to be seen & observed how the present judgment affects the yet to be notified amendment to S.11 which has been although amended vide the Arbitration & Conciliation (Amendment) Act, 2019 which received the assent of the President on August 9, 2019. The provisions of said Amendment Act, amending appointment provisions, which is yet to be notified by the Govt of India, proposes an appointment of arbitrator under S. 11 of the Act shall be made, on an application by the party or by the arbitral institution designated by the Supreme Court, in case of international commercial arbitration. Nonetheless, different arbitral institutions may vary & adopt to different procedures of appointment of arbitrators &to the satisfaction &consent of the parties to arbitration agreement.